This post provides an overview of your tax filing requirements and ways to save on taxes when you have a cleaning services and pressure washing business.
Tax Forms You’ll Use
There are several potential tax forms you might use for a pressure washing business.
Most people who work on their own report business income on their personal tax returns using Schedule C. When you file your taxes in April, you’ll just add a few pages to your tax return.
Tell your tax filing software that you have business income, and it will take care of the rest.
If you create an LLC, you have two options for filing taxes as an LLC.
If you do nothing, you’ll report your LLC income on Schedule C of your personal Form 1040 Individual Tax Return.
You can also choose to elect to have your LLC taxed as a corporation.
If you create a C-Corporation or S-Corporation, you’ll need to file a separate corporation tax return each year. That’s either Form 1120 for C-Corporations or Form 1120-S for S-corporations.
You’ll also pay yourself through wages and/or dividends and report your personal income on your personal tax return. If you use an S-Corporation, you’ll report the corporation’s income and loss on Schedule E of your personal tax return.
You’re a partnership if you own your business with at least one other person.
The partnership files a separate Form 1065 tax return with its profit or loss. Each partner then receives a Form K-1 with his or her share of the profits.
Partners report the information from Form K-1 on Schedule E of Form 1040.
If you’re a married couple, you may be able to avoid being classified as a partnership and file using Schedule C on your personal tax return instead. For married couples to qualify as sole proprietors filing on Schedule C, they need to:
- Operate in a community property state, or
- Be a qualified joint venture
To be a qualified joint venture, the married couple needs to:
- Be the only owners of the business
- File jointly
- Both materially participate in the business
- Both agree to the qualified joint venture election
- Each file a separate Schedule C with his or her share of the income and expenses and resulting profit and loss (usually a 50/50 split)
Your taxable income includes the rate you charge for your services plus any tips or bonuses you receive.
Tips or bonuses you receive as a result of your cleaning services do not count as gifts. It doesn’t matter if you receive them at the time of service or around the holidays.
Tips and bonuses are always taxable.
Your taxable income can be reduced by deductions for your expenses.
Dealing with 1099s
If you offer residential cleaning services, homeowners should not issue a 1099-NEC. If you accept electronic payments, you may receive a Form 1099-K from your payment processor.
Businesses, including landlords, will normally issue you a 1099-NEC if they paid you more than $600 during the year and you’re not a corporation. If they paid you electronically through a payment processor that issues Form 1099-K, they should not issue a Form 1099-NEC for payments reportable on the Form 1099-K.
Reminder: Your income is taxable even if you didn’t get a 1099 for it.
In some cases, a 1099, especially a 1099-K, may include nontaxable payments such as personal transactions. Only report your taxable business income.
Taxes You’ll Owe
As a sole proprietor, you’ll normally owe
- Federal income taxes according to your tax bracket
- State income taxes according to your tax bracket
- Self-employment taxes of 15.3% (12.4% to Social Security and 2.9% to Medicare)
Your taxes are usually based on your net profit after expenses.
In most cases, you’ll need to make five IRS tax payments each year.
If you live in a state with income taxes, you’ll need to make payments to both the IRS and your state. Double-check that your state uses the same dates as the IRS (most do).
- April 15th: Estimated taxes on your income for January through March
- June 15th: Estimated taxes on your income for April through June
- September 15th: Estimated taxes on your income for July through September
- January 15th: Estimated taxes on your income for October through December
- April 15th: File your tax return and pay any remaining taxes for the previous January through December
If you skip the four quarterly estimated tax payments and wait to pay taxes when you file your tax return, you’ll usually owe a penalty.
Each quarterly payment should be roughly 25% of the taxes you expect to owe for the year.
Whether you have to collect sales tax on pressure washing, cleaning, or janitorial services depends on your state. It’s important to check this before you start offering any services.
Most states require you to obtain a sales tax permit before you can start any services subject to sales tax.
In other words, you can’t wait until April to worry about sales tax. You must register with your state before you start doing business.
If your state doesn’t have a sales tax on cleaning services, there’s a good chance that you still need to get a business license from your state or local government before you start offering any services.
If you hire employees, you have several potential responsibilities including:
- State and federal income tax withholding
- Social Security and Medicare taxes (FICA)
- State and federal unemployment taxes
- State workers’ compensation insurance
- Issuing W-2s and other tax forms
Your responsibilities often include filing payroll tax returns and paying payroll taxes regularly throughout the year. You may need to file paperwork with one or more state agencies before you hire your first employee or when you hire new employees.
Talk to a local accountant or business lawyer before you hire your first employee.
There is always a temptation to get around these requirements by calling your workers 1099 contractors.
Generally, if you hire someone, tell them what to do, and set their schedule, they’re an employee not a contractor. It doesn’t matter if their job is pressure washing, sales, marketing, bookkeeping, or other administrative work.
While people often get away with misclassifying workers, the penalties if you get caught include fines, back taxes, interest, and even possible criminal charges. If you have enough money coming in that you’re ready to start hiring, the consultation fee with a business lawyer or CPA to get things right is more than worth it.
Pressure Washing Business Tax Deductions
The tax law allows you to claim your ordinary and necessary business expenses. That’s a fancy way of saying you can deduct pretty much anything that you reasonably spend to do business.
What the IRS doesn’t want you doing is trying to use your business to deduct your personal expenses.
In order to claim your expenses, you’ll need to track the reason for each expense and save all of your receipts. You can use inexpensive accounting software to help you.
Common tax deductions for pressure washing and cleaning services include the following.
When you drive around to pressure wash, you can track your vehicle expenses like gas, insurance, maintenance, repairs, and depreciation. You can either track all of your actual expenses or use the standard mileage deduction.
If you drive a truck, van, or SUV, it’s usually better to use the actual expenses method. The standard mileage deduction will usually work out to a smaller deduction.
If you drive a car, you can often come out ahead by claiming the standard mileage deduction.
No matter which method you use, you’ll need to keep a mileage log using a mileage tracking app or by hand.
If you use the actual expenses method, you can deduct a percentage of your expenses equal to your business miles divided by your total miles driven during the year. If you use the standard mileage deduction, only your business miles count.
When you buy equipment such as pressure washers and other cleaning tools, special rules apply. The default rule for expensive purchases of assets that you expect to last for several years is to use depreciation.
Depreciation means that instead of taking your deduction all at once, you deduct a little each year. (See IRS Tax Topic 704)
Most business assets depreciate over seven years. So if you made a $7,000 purchase, you can deduct $1,000 per year.
However, most pressure washing businesses are small enough to not have to deal with depreciation. Section 179 of the tax code allows qualifying small businesses (that’s probably you) to take an immediate deduction in the year of purchase.
If you lease or rent equipment, you can usually deduct your rent payments as you make them.
Remember that a tax write-off doesn’t mean the rental is free. It means you usually save around 25% to 40% of the rental cost in taxes.
From a business standpoint, it’s usually cheaper to buy equipment than rent it. The main exception is if you need an expensive piece of equipment for a one-off special project.
Equipment Maintenance and Repairs
Paying to maintain and repair your equipment is also deductible. Deductible expenses include buying replacement parts or paying someone else to do the repair.
Insurance for your vehicle will fall under your vehicle expenses. You can also take a separate deduction for other types of insurance such as commercial general liability policies.
Advertising expenses are generally deductible in full. These can include buying ads and building and maintaining a website.
Cleaning supplies such as soaps, solutions, and paper towels are deductible. Items that need frequent replacement, such as rags and brushes, are also deductible as supplies.
Clothing is usually only deductible when it can’t be used for other purposes.
Your company t-shirts usually aren’t deductible. If you wear special boots, waterproof clothing, protective gloves, or safety goggles, those are usually deductible.
If you have an office, you can deduct the rent payments or take the home office deduction. You can also deduct expenses like paper, pens, and business internet.
If you hire an accountant, lawyer, or other professional to help you with your business, that cost is generally deductible.
Wages and Contractor Payments
The money you spend to hire employees and independent contractors is generally deductible. This includes wages, benefits, and taxes.
There are three common personal tax deductions you can take as a sole proprietor or independent contractor. These are separate from your Schedule C or business tax return deductions.
- Qualified Business Income Deduction: If you’re not a C-corporation, you usually get an automatic income tax deduction equal to 20% of your net profit. This makes up for C-Corporations getting a lower tax rate.
- Self-Employed Health Insurance Deduction: If you’re not eligible for health insurance through an employer or your spouse’s employer, you can deduct your premiums through the self-employed health insurance deduction.
- Retirement Contributions: Small business owners can open a SEP IRA or Solo 401(k) which let you make deductible retirement account contributions worth up to 20% of your net profit. If you have employees, talk to your accountant first as special rules apply.
Do you need an LLC or corporation for a pressure washing business?
There are five things to consider when deciding whether you want to create an LLC or S-corporation versus remaining an unincorporated sole proprietor.
The biggest misconception about LLCs and corporations is that they allow you to take more deductions. They do not.
You get the same deductions no matter what form of business they use.
There are often legal benefits to creating an LLC or corporation such as liability protection.
In many cases, purchasing insurance can give you all or most of the same protections. In addition, having an LLC or corporation does not mean that you don’t need insurance or that you can’t be sued.
To learn more about liability protection and other legal issues, talk to a local attorney and/or insurance agent. The best course of action varies by state.
If you form an S-Corporation or elect to have your LLC taxed as an S-Corporation, you may be able to reduce your self-employment taxes. However, when all or most of your income is from your own labor, the tax savings can be minimal.
The biggest challenge if you want to do more research is the S-corporation reasonable compensation rules that limit how much you can reduce your self-employment taxes.
LLCs and corporations are not free to set up or maintain. You’ll commonly need to pay for:
- Initial filing (several hundred dollars minimum)
- Annual filing fees ($50 to $500)
- Additional tax returns
- Legal and accounting fees*
*If you choose to DIY, research whether your state requires you to hire a lawyer if you ever get sued by a customer or need to sue a customer. Some states require corporations to hire lawyers even for small claims court and don’t let owners or managers represent their business.
Some states charge additional taxes on LLCs and corporations. This may apply even if you’re a sole proprietor or S-Corporation.
The additional taxes may include a business income tax or a flat-rate tax for the privilege of doing business in that state. Some states have different rules for LLCs versus corporations.